Government Contracts – Focus on Regulationhttps://www.hlregulation.com
Thu, 23 May 2019 23:42:36 +0000en-UShourly1https://wordpress.org/?v=4.9.10Likely FDA Impact of the Government Shutdown: Regulatory Submission Reviews, Inspections, and Research Projectshttps://www.hlregulation.com/2018/12/27/fda-impact-government-shutdown-regulatory-submission-reviews-inspections/
Thu, 27 Dec 2018 23:26:12 +0000https://www.hlregulation.com/?p=10952The U.S. government shutdown that began December 22, 2018 affected only about a quarter of federal agencies, because most had already been funded for FY 2019. Unfortunately, FDA is one of the agencies with at least some functions shut down, as was announced yesterday. Among other things, FDA has furloughed 42% of its employees, according

]]>The U.S. government shutdown that began December 22, 2018 affected only about a quarter of federal agencies, because most had already been funded for FY 2019. Unfortunately, FDA is one of the agencies with at least some functions shut down, as was announced yesterday. Among other things, FDA has furloughed 42% of its employees, according to a tweet from Commissioner Scott Gottlieb, M.D. Nonetheless, Dr. Gottlieb said the agency would be “continuing vital activities, to the extent permitted by the law, that are critical to ensuring public health and safety in the United States,” including:

Maintaining core functions to handle and respond to emergencies,

Supporting high-risk food and medical product recalls,

Pursuing civil and criminal investigations when the public health may be imminently at risk,

Screening imported food and medical products,

Addressing other critical public health issues that involve imminent threats to the safety of human life, and

On the other hand, until legislation making FY 2019 appropriations for FDA is enacted, the agency will not be able to:

Accept user fees assessed for FY 2019, or

Accept any regulatory submissions for FY 2019 that require a user fee payment and that are submitted during the lapse period.

According to an HHS contingency staffing plan, FDA will “be unable to support some routine regulatory and compliance activities,” including “some medical product, animal drug, and most food related activities.” The plan says FDA “will also pause routine establishment inspections, cosmetics and nutrition work, and many ongoing research activities.”

Possible Implications for CDER-Regulated Products

The impact on CDER will be similar to the other product Centers that rely on user fees. The biggest impediment will be that FDA will not accept new applications or supplements that require a fee because fees cannot be processed during the lapse period. Otherwise, the user fee-supported activities will generally continue. For PDUFA, that includes the broadly defined “process for the review of human drug applications,” under Sec. 735(6) of the Act, which includes the “activities necessary for the review of human drug applications and supplements.” But based on past experience with FDA shutdowns, the absence of a significant portion of the FDA staff, over time, places a strain on CDER drug review activities, which can cause delays that indirectly affect drug review.

Implications for CDRH-Regulated Products

It will not accept any applications subject to user fees if the user fee has not been paid and fully processed prior to the lapse in funding.

It will accept such filings for review if the user fee was paid and fully processed prior to the funding lapse.

If the user fee has been paid but not fully processed prior to the funding lapse, the application will be placed on user fee hold until the government reopens and the payment can be fully processed.

Additionally, Hogan Lovells has learned through direct agency discussions that processing of Investigational Device Exemptions is expected to continue.

Some agency correspondence is likely to be delayed, particularly for informal inquiries or those not subject to user fees. For example, the Office of Combination Products has communicated that it is not able to read or respond to messages until either a FY 2019 appropriation or continuing resolution for FDA has been enacted. Similar communication delays are anticipated among other FDA offices.

In sum, while FDA’s review of pending applications subject to user fees is expected to continue during this partial shutdown, new applications subject to user fees will not be reviewed until such time as a FY 2019 appropriation or continuing resolution for the FDA is enacted and the fee processing office reopens. Depending on the length of the shutdown, medical product centers may well be looking at a sizable backlog of applications to triage when the agency is fully operational again, not to mention other industry correspondence. Thus, if the current shutdown persists, industry should anticipate that certain agency delays will likely continue for some time.

With respect to domestic and foreign inspections, it is unclear to what extent the furlough period will impact scheduling of these inspections into 2019.

In a Thursday letter to FDA employees, Dr. Gottlieb expressed sympathy for the challenges that the shutdown would impose on agency staff. We will continue to monitor and report on how the government shutdown is affecting regulatory work in the U.S.

]]>Small Business Runway Extension Act of 2018 Becomes Law: Increases Revenue Look-back Period to Five Years for Small Business Size Eligibility Determinationshttps://www.hlregulation.com/2018/12/21/small-business-runway-extension-act-of-2018-becomes-law-increases-revenue-look-back-period-to-five-years-for-small-business-size-eligibility-determinations/
Fri, 21 Dec 2018 20:20:21 +0000https://www.hlregulation.com/?p=10948On December 17, 2018, the Small Business Runway Extension Act of 2018 (“Act”) (H.R. 6330) was passed by President Trump into law. The new law amends the Small Business Act at 15 USC 632 to require that the size of a federal contractor for purposes of determining small business eligibility be measured based on the

]]>On December 17, 2018, the Small Business Runway Extension Act of 2018 (“Act”) (H.R. 6330) was passed by President Trump into law. The new law amends the Small Business Act at 15 USC 632 to require that the size of a federal contractor for purposes of determining small business eligibility be measured based on the average of five years rather than three years of annual revenue. Ultimately, this increase in the Small Business Administration (“SBA”)’s look-back revenue period will allow more small businesses to qualify as “small” for federal contracting purposes for a longer period of time.

How does a federal contractor’s revenue impact its small business eligibility?

Under the Small Business Act, in order to qualify as a small business, a business must meet certain size standards based on the North American Industry Classification System (NAICS) code associated with its industry. SBA’s size standards are stated either in the number of employees or annual receipts. SBA’s size standard represents the largest size that a business (including its affiliates) may be in order to remain classified as a small business for federal contracting programs and set-asides. For example, the size standard for NAICS code 517410 (Satellite Telecommunications) is $32.5 million. In order for a satellite telecommunications company to be small its annual receipts, together with its affiliates, could not exceed $32.5 million.

What does the law change and how will it impact federal contractors?

Under the new law, the size of a federal contractor is calculated by SBA based on averaging its annual gross receipts over the past five years, up from three years, in order to determine its small business program eligibility under a receipts size standard.

Particularly, this amendment will benefit small businesses in industries subject to receipts based SBA size standards. For a number of smaller businesses, a longer look-back revenue review period will result in lower average annual receipts if it is able to include additional lower revenue years in the calculation.

The law aims to “help advanced-small contractors successfully navigate the middle market as they reach the upper limits of their small size standard.” SeeHouse of Representative Report 115-939 (“Report”). Many businesses face significant challenges when they outgrow their small business size status due to sudden rapid growth which typically occurs when a small business wins a large contract. The law’s increase in the revenue look-back period is “designed to reduce the impact of rapid-growth years which result in spikes in revenue that may prematurely eject a small business out of their small size standard.” Id. Contractors that become no longer small lose access to valuable set-aside contracts and SBA assistance and tend to experience difficulties in competing in the full and open federal marketplace with much larger businesses.

In order to help combat this problem, the law will provide more small businesses a longer small business eligibility “runway” which allows them more time to grow and “develop their competiveness and infrastructure” before they become other-than-small and are required to compete in the open market. Moreover, the law is aimed to “protect federal investments in SBA’s small business programs by promoting greater chances of success in the middle market for newly-graduated firms, enhancing competition against large prime contractors”. Id.

What’s next?

The new 5-year calculation period will not become effective until SBA revises its regulations. On December 21, 2018, SBA issued an internal Information Notice clarifying that the change is not effective immediately and is not applicable to present contracts, offers or bids. Therefore, until the regulations are amended, businesses still must report their receipts based on a three-year average. The revised regulations should be forthcoming and hopefully, will provide additional guidance on how the change will impact current and prospective federal contractors’ small business eligibility, including companies that have been in business for less than five years.

]]>With the opportunity for global pharmaceutical companies to gain new access to the Chinese market presenting itself like never before (see our previous blog posts here and here), significant news broke on December 7, 2018, regarding a newly implemented pilot centralized drug procurement program (the “program”) that will have significant ramifications for global pharmaceutical companies. Specifically, China just announced the reduction of prices for certain off-patent generic drugs by up to 96%. Under the program, the government will award a contract to the lowest bidder, who will be guaranteed a sale volume of 60-70% of the total market for a year. The move is aimed at reducing drug prices and encouraging consolidation in the generic drug industry. The program will be a significant change in how generic drugs are priced and procured in China.

The framework of the program was established by the Central Comprehensively Deepening Reforms Commission (CCDRC), a governing agency that is directly lead by the Politburo of the Communist Party of China. The CCDRC has entrusted the Shanghai City Government to implement the program, which covers 11 major cities in China, including Beijing, Tianjin, Shanghai, Chongqing, Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Chengdu, and Xi’an. Together, according to a Chinese news source (“21st Century Business Herald”), the combined healthcare markets from these 11 cities constitute about 30% of the total Chinese market. Under the program, pharmaceutical companies had the opportunity to submit bids for 31 generic drugs and the contracts were awarded under the following principles:

When there are three or more bidders, the lowest bidder will automatically be awarded the contract.

When there are two bidders, the lower bidder will be chosen to further negotiate with the procurement office. The drug price discount rate will be negotiated using the average discount rates from other generic drugs as a reference.

When there is just one bidder, the drug price discount rate will be negotiated using the average discount rates from other generic drugs as a reference.

After the bidding, which took place on-site in Shanghai, generic drug manufacturers were awarded contracts for 25 generic drugs with guaranteed sale volume in the 11 major cities in China. The average price dropped 52%, with the highest price reduction being 96%. We have translated the drugs that were awarded contracts under the program in a list below. While many global pharmaceutical companies participated in the bidding process, all but two successful bids came from domestic Chinese drug manufacturers. Additional information on the generic drug manufacturers who had winning bids and the pricing information can be found online at: http://www.smpaa.cn/gjsdcg/files/file5772.pdf.

No.

Drug

Drug Manufacturer

1

Atorvastatin calcium tablets

Beijing Jialin Pharmaceutical

2

Rosuvastatin calcium tablets

Zhejiang Jingxin Pharmaceutical Co. Ltd.

3

Clopidogrel hydrogen sulfate tablets

Shenzhen Salubris Pharmaceuticals

4

Irbesartan tablets

Zhejiang Huahai Pharmaceutical Co., Ltd.

5

Amlodipine besylate tablets

Zhejiang Jingxin Pharmaceutical Co. Ltd.

6

Entecavir dispersible tablets

Chia Tai Tianqing Pharmaceutical Group Co. Ltd

7

Escitalopram oxalate tablets

Kelun Group

8

Paroxetine hydrochloride tablets

Zhejiang Huahai Pharmaceutical Co., Ltd.

9

Olanzapine tablets

Jiangsu Hansoh Pharma

10

Cefuroxime axetil tablets

Chengdu Brilliant Pharmaceutical Co., Ltd

11

Risperidone tablets

Zhejiang Huahai Pharmaceutical Co., Ltd.

12

Gefitinib tablets

AstraZeneca AB (Kagamiishi Plant, Nipro Pharma Corporation)

13

Fusinopril tablets

Sino-American Shanghai Squibb Pharmaceuticals Co., Ltd.

14

Irbesartan hydrochlorothiazide tablets

Zhejiang Huahai Pharmaceutical Co., Ltd.

15

Lisinopril tablets

Zhejiang Huahai Pharmaceutical Co., Ltd.

16

Tenofovir disoproxil fumarate tablets

Chengdu Brilliant Pharmaceutical Co., Ltd

17

Losartan potassium tablets

Zhejiang Huahai Pharmaceutical Co., Ltd.

18

Enalapril maleate tablets

Yangtze River Pharmaceutical Group

19

Levetiracetam tablets

Zhejiang Jingxin Pharmaceutical Co. Ltd.

20

Imatinib mesylate tablets

Jiangsu Hansoh Pharma

21

Montelukast sodium tablets

Anbisheng System

22

Montmorillonite powder

Simcere Pharmaceutical Group

23

Pemetrexed disodium for injection

Sichuan Huiyu Pharmaceutical

24

Flurbiprofen axetil injection

Sichuan Huiyu Pharmaceutical

25

Dexmedetomidine hydrochloride injection

Yangtze River Pharmaceutical Group

It is unclear when this program will be rolled out nationwide and how many generic drugs will eventually be covered. It is important to recognize that under the program, the only determining factor for a successful bid will be the price. Thus, as global pharmaceutical companies look to do business in China, the implementation of this program will undoubtedly impact strategies on how to commercialize drug products in China and how to best compete in a bidding war with a domestic Chinese drug manufacturer.

It is also notable that this program has caused significant impact in the Chinese financial markets. Stocks have reacted negatively thus far. It will be interesting to see whether the concept of “lowest bid wins” affects the public’s view of the quality of their drug products. On the other hand, it is expected the program will facilitate the generic drug industry’s consolidation and push more Chinese pharmaceutical companies towards innovative drug research and development. We will be monitoring the program closely, and particularly looking at whether there are any changes made to the program once rolled out nationwide.

]]>FDA and DoD strengthen collaboration for medical products with military applications that could also be expanded to the general populationhttps://www.hlregulation.com/2018/11/08/fda-dod-strengthen-collaboration-medical-products-military-applications/
Thu, 08 Nov 2018 17:00:50 +0000https://www.hlregulation.com/?p=10856On November 2, FDA and the Department of Defense’s (DoD) Office of Health Affairs signed a Memorandum of Understanding (MoU) that formally establishes the framework under which the DoD and FDA will implement Public Law 115-92, which was enacted in 2017. The law gives the DoD new opportunities to advocate to FDA for expedited development,

]]>On November 2, FDA and the Department of Defense’s (DoD) Office of Health Affairs signed a Memorandum of Understanding (MoU) that formally establishes the framework under which the DoD and FDA will implement Public Law 115-92, which was enacted in 2017. The law gives the DoD new opportunities to advocate to FDA for expedited development, review, and Emergency Use Authorization (EUA) for medical products that could help protect and treat U.S. military forces; we analyzed that legislation in a blog post here.

Perhaps more significantly, FDA has chosen to build on the new law to facilitate development and FDA review of medical products with military applications that may also have broader use for general populations. In FDA’s initial Work Plan for the new law, FDA committed to issue guidance to facilitate development of medical products for “austere environments” relevant to the military. In fact, the Work Plan states that the guidance will “include information on how the approval can be expanded to the general population, when relevant. The latter is important for the ultimate availability and sustainability of the DoD medical product development enterprise.”

Under the terms of this MoU:

DoD will develop and maintain a Medical Product Priority (MPP) List (“Priority List”) under parameters set by the MoU, and FDA will expedite the development and review of medical products on that list;

DoD and FDA’s Center for Biologics Evaluation and Research (CBER) will hold quarterly meetings to discuss regenerative medicine advanced therapy, blood, and vaccine medical products that are on the Priority List;

FDA agrees to facilitate DoD’s ability to field investigational medical products under a clinical trial, under an expanded access mechanism, or under an EUA; and

FDA agrees to coordinate DoD requests to expedite the review of investigational submissions, applications for approval/licensure, and submissions/notifications for clearance of such medical products reasonably likely to address a life-threatening military emergency (or significant potential for a military emergency).

Opportunities ahead for drugs deemed valuable to the U.S. military

We believe the enhanced collaboration with DoD will create new opportunities for sponsors of products that DoD recognizes as valuable to military populations, even if the drugs are also important for the general population. In some cases this will create an opportunity to be treated as if breakthrough designation had been obtained even for drugs that might not otherwise qualify for this beneficial designation. We will be closely watching for FDA’s announcements as to guidance and anticipated public meeting(s) regarding how the enhanced FDA/DoD collaboration on medical products with military application can be expanded to help broader civilian populations.

]]>On October 15, CMS released a proposed rule titled “Medicare and Medicaid Programs: Drug Pricing Transparency,” which would require direct-to-consumer (DTC) advertisements for prescription drugs covered by Medicare or Medicaid to include the Wholesale Acquisition Cost (WAC). This proposed rule resembles a rejected Senate amendment to the FY-2019 Labor-HHS-Education appropriations bill (analyzed here) that would have provided HHS $1 million to implement rules requiring manufacturers to disclose drug list prices in DTC advertising; however, House Republicans declined to adopt that amendment.

Specifically, the proposed rule would require DTC advertisements to include a text statement disclosing the WAC for a typical 30-day regimen or for a typical course of treatment, whichever is most appropriate. No voiceover would be required. The proposed rule includes an exception for drugs with a WAC of less than $35 per month.

Enforcement by private right of action

This proposed rule is the Administration’s latest step in response to ongoing scrutiny on drug pricing and transparency as highlighted in President Trump’s May 2018 Blueprint to lower drug prices. However, it is notable that the Blueprint charged FDA with evaluating whether and how to require manufacturers to include list prices in advertising; yet, the proposed rule was released by CMS and not FDA, and is based on CMS’ authority to regulate the Medicare and Medicaid programs.

This proposed enforcement mechanism relies primarily on a private right of action under existing competition laws and, secondarily, public admonition by CMS. Under the proposed rule, HHS would maintain a public list of drugs advertised in violation of the rule, but the rule anticipates that the primary enforcement mechanism would be the potential of private suits under the Lanham Act for unfair competition in the form of false or misleading advertising.

PhRMA to voluntarily direct consumers to price info

Shortly before HHS Secretary Alex Azar announced the proposed rule, Pharmaceutical Research and Manufacturers of America (PhRMA) President Stephen Ubl announced the group’s members each agreed to voluntarily include in TV ads directions for consumers to find drug pricing information on the manufacturers’ websites. Under this initiative, which starts April 15, 2019, information available online will include the drug’s WAC as well as a range of potential out-of-pocket costs patients might pay. Primarily, PhRMA’s initiative differs from CMS’ proposal in that it is entirely voluntarily, and it involves drug makers directing consumers to pricing information rather than directly stating costs in DTC ads.

In response, Azar criticized PhRMA’s initiative as inadequate, saying, “Our vision for a new, more transparent drug-pricing system does not rely on voluntary action.” PhRMA asserted that including the WAC in commercials may discourage patients from seeking needed medical care. Similarly, J&J CFO Joseph Wolk said listing WACs on TV ads “could be somewhat confusing and actually act as a deterrent to good, responsible health care and we just want to make sure that that doesn’t play out that way,” Bloomberg reported.

Rule subject to legal attack

As we previously discussed here, this measure may raise First Amendment concerns as a form of compelled speech. Second, there is question over whether CMS has authority to implement this regulation. Neither the Food Drug and Cosmetic Act (FDCA) nor FDA’s implementing regulations contemplate mandatory disclosure of drug prices in promotional materials, and it is difficult to see how the failure to include pricing information is thus misleading to consumers. Meanwhile, CMS’ authority is tied specifically to Medicare and Medicaid.

Solicitation of comments

CMS said it is soliciting specific comment on a number of issues, including:

Whether the proposed regulations should apply to advertisements in other media, such as print ads or radio.

Whether compliance with the rule should be a condition of payment from federal health programs.

Whether WAC is the best measure for the stated purposes of price transparency and comparison shopping.

How to treat an advertised drug that must be used in combination with another non-advertised drug or device.

The potential effects of the proposed rule, including how manufacturers set the WAC for advertised products, and how patient behavior may change in response to this pricing information.

CMS will accept public comments on the Proposed Rule until December 17, and HHS expects the new requirement would take effect 30 days after publication of a final rule. If you have any questions or want to discuss submitting a comment, please contact any of the authors listed below or the Hogan Lovells attorney with whom you regularly work.

]]>VA and SBA Release Complementary Final Rules Updating their Veteran-Owned Small Business Regulationshttps://www.hlregulation.com/2018/10/08/va-and-sba-release-complementary-final-rules-updating-their-veteran-owned-small-business-regulations/
Mon, 08 Oct 2018 21:23:39 +0000https://www.hlregulation.com/?p=10767On September 24, 2018 and September 28, 2018, the Department of Veterans Affairs (VA) and the Small Business Administration (SBA), respectively, released complementary final rules (VA final rule and SBA final rule) that amend the regulations governing Veteran-Owned Small Businesses (VOSBs) and Service-Disabled Veteran-Owned Small Businesses (SDVOSBs). Effective October 1, 2018, the SBA’s regulations now

]]>On September 24, 2018 and September 28, 2018, the Department of Veterans Affairs (VA) and the Small Business Administration (SBA), respectively, released complementary final rules (VA final rule and SBA final rule) that amend the regulations governing Veteran-Owned Small Businesses (VOSBs) and Service-Disabled Veteran-Owned Small Businesses (SDVOSBs). Effective October 1, 2018, the SBA’s regulations now govern the ownership and control requirements for all VOSBs and SDVOSBs, and the VA regulations that formerly provided eligibility requirements for VOSBs and SDVOSBs have been eliminated.

The VA will continue to be responsible for verifying that applicant firms qualify as VOSBs or SDVOSBs under the SBA’s ownership and control regulations at 13 C.F.R. Part 125, and the Center for Verification and Evaluation (CVE) at the VA will continue to receive and review applications for eligibility. Firms that have been verified by the VA will be listed in the Vendor Information Pages (VIP) database as “verified”, and will be eligible to compete for government contracts that are set aside for VOSBs and SDVOSBs.

The changes in the final rules are significant because they eliminate inconsistencies between the former VA and SBA regulations and provide more clarity on various guidelines and definitions that apply to SDVOSB and VOSB concerns. Below is a summary of significant amendments to the VA and SBA regulations of which contractors should be aware.

VA Final Rule Significant Changes

The VA’s final rule:

Refers to the SBA’s regulations to govern issues of affiliation, ownership, and control related to VOSBs and SDVOSBs, and adopts the SBA’s definitions for “service-disabled veteran,” “SDVOSB,” “surviving spouse,” “veteran,” and “VOSB.”

Clarifies the effect of “good character,” or lack thereof, on participation in the Vets First Contracting Program (the “Program”). It provides that any individuals having an ownership or control interest in the concern and who are suspended, debarred, incarcerated, on parole or probation, or formally convicted of certain crimes will jeopardize the concern’s eligibility and be cause for immediate removal from the VIP database. Moreover, applicants and concerns that are found to have knowingly submitted false statements during the application process will have their applications denied and/or will no longer be eligible for the Program.

Expands Program ineligibility grounds to include certain disqualifying financial obligations, such as tax liens and other unresolved debts owed to governmental entities. Under the cancellation procedures, a concern has the opportunity to explain the circumstances of any financial obligation, and if such explanation is adequate, it may remain in the VIP database.

Allows concerns that have undergone a change in ownership to submit a new application to the VA within 30 days of the change.

Outlines new application processing procedures. For example, it increases the application processing time to 90 days, establishes that an applicant’s eligibility will be based on the totality of the circumstances, and identifies bankruptcy as a change in circumstance that could make a concern ineligible for the Program.

Provides that the SBA’s Office of Hearings and Appeals (OHA) will adjudicate appeals of initial denials on the grounds of ownership and control in accordance with 13 C.F.R. Part 134. The VA notes that concerns do not retain their eligibility during the appeal process—a concern will be removed immediately upon a finding that it no longer qualifies for the VIP database.

Adopts the SBA’s regulations at 13 C.F.R. Part 125 regarding joint venture requirements. Previously, the VA and the SBA had different rules regarding profit allocation for joint ventures, but under the new regulations, the VA and the SBA treat joint ventures the same. The final rule also requires that, for VA contracts, a joint venture applicant must be a separate legal entity.

SBA Final Rule Significant Changes

The SBA’s final rule:

Adds new regulations addressing when a firm is allowed to qualify as an SDVOSB when there is a surviving spouse of a deceased veteran.

Replaces the definitions of “permanent caregiver,” “service-disabled veteran,” and “surviving spouse.” The final rule also adds a new definition of “service-disabled veteran with a permanent and severe disability.”

Adds a definition for Employee Stock Ownership Plan (ESOP) and clarifies certain circumstances in which a firm can qualify as an SDVOSB when there is an ESOP. Under the new SBA regulations, a public corporation qualifies as a SDVOSB if one or more service-disabled veterans control the concern’s management and operations and own at least 51% of the stock, exclusive of stock owned by an ESOP.

Adds multiple new rebuttable presumptions regarding ownership and control of SDVOSBs, including the following:

A service-disabled veteran does not control the firm when he/she is unable to work for the firm during the normal working hours for businesses in that industry.

A service-disabled veteran does not control the firm if that individual is not located within a “reasonable commute” to the firm’s headquarters and/or job site.

One or more non-service-disabled veterans control or have the power to control a firm under the following circumstances:

The non-service-disabled veteran is (1) involved in the management or ownership of the firm and (2) is a current or former employer, or a principal of a current or former employer, of any service-disabled veteran upon whom the firm’s eligibility is based.

The non-service-disabled veteran receives compensation from the firm that exceeds the compensation received by the highest-ranking officer (i.e., CEO or President).

Where the concern is co-located with another firm in the same or similar line of business and that firm or an owner, director, officer, or manager, or a direct relative of an owner, director, officer, or manager of that firm owns an equity interest in the concern.

Where the concern shares employees, resources, equipment, or services with another firm in the same or similar line of business, and that firm or an owner, director, officer, or manager, or a direct relative of an owner, director, officer, or manager of that firm owns an equity interest in the concern.

Where a non-service-disabled veteran with an equity interest in the concern provides critical financial or bonding support or a critical license.

Business relationships exist with non-service-disabled veterans that cause such dependence that the concern cannot exercise independent business judgment without great economic risk.

Permits five “extraordinary circumstances” under which a minority investor may have a veto power (i.e., negative control) over a SDVOSB’s decision-making process without rendering the firm ineligible. These five extraordinary circumstances are (1) adding a new equity stakeholder; (2) dissolving the organization; (3) selling the organization; (4) merging the organization with another organization; and (5) declaring bankruptcy.

Requires that service-disabled veterans own at least 51% of the aggregate voting interest in the partnership.

Overall, these revised regulations will eliminate much of the confusion that veteran-owned businesses have faced when dealing with parallel and sometimes conflicting VA and SBA regulations. One issue not addressed in the final rules is the impact of the new regulations on currently verified concerns under the VA’s Program that do not meet these new ownership and eligibility requirements. This issue may be resolved in future SBA OHA cases and VA guidance.

In light of these changes, current and prospective VOSBs and SDVOSBs should carefully review their ownership structure, bylaws, and shareholder, voting, and operating agreements to ensure that they comply with the new eligibility requirements, especially regarding ownership and control. A business that fails to comply with these requirements may be ineligible for or disqualified from the VOSB and SDVOSB contracting programs and could become vulnerable to small business size challenge.

The authors are available for questions. The Government Contracts Practice at Hogan Lovells advises businesses on interacting with the VA and the SBA and optimizing opportunities to do business with the Federal Government.

]]>For Now, DoD Halts Efforts to Change Policy on Progress Paymentshttps://www.hlregulation.com/2018/10/04/for-now-dod-halts-efforts-to-change-policy-on-progress-payments/
Fri, 05 Oct 2018 02:34:04 +0000https://www.hlregulation.com/?p=10757Deputy Secretary of Defense Patrick Shanahan announced on Monday, October 1, 2018, that the U.S. Department of Defense (“Department” or “DoD”) was withdrawing its proposal that would have made sweeping changes to the rules that govern the release of progress payments to contractors under DoD contracts. In rescinding the proposed rule, Deputy Secretary Shanahan cited

]]>Deputy Secretary of Defense Patrick Shanahan announced on Monday, October 1, 2018, that the U.S. Department of Defense (“Department” or “DoD”) was withdrawing its proposal that would have made sweeping changes to the rules that govern the release of progress payments to contractors under DoD contracts. In rescinding the proposed rule, Deputy Secretary Shanahan cited to a lack of coordination within the Department that led to a premature release of the proposed amendments.

Under its proposed rule, DoD would have amended policy relating to progress payments and performance-based payments for DoD contractors by reducing the customary progress payment rate for large contractors from 80 percent to 50 percent of incurred costs. Increased payments—up to 95 percent of incurred costs—would have been tied to measures such as work quality and on-time delivery. A finding of fraud or criminal offense involving the contractor, even if related to a different project, would have reduced the rate to 25 percent of incurred costs. Small business contractors would have continued to receive a base rate of 90 percent of incurred costs under the proposed rule.

According to the Department, these changes were intended to align with the preference for use of performance-based payments expressed by Congress in Section 831 of the 2017 National Defense Authorization Act. DoD claimed such revisions were needed to “reset” progress payment rates to better align with lower interest rates, and avoid furthering what it described as the “unintended consequence of the past practice associated with providing contract financing in excess of what was necessary.”

Many lawmakers and the majority of the defense industry[1] disagreed, raising concern that the rule misconstrued the preference for use of performance-based payments expressed in Section 831. They also worried that contractors would be unable to receive the increased payment rates conditioned on performance, as the criteria for receiving such rates were subjective and not adequately tied to actual contractor performance. Ultimately, the rule as proposed would have made it more difficult for businesses to do work with the DoD, and according to the proposal’s opponents, led to a stifling of defense contractor investment in innovation.

Rescission of the proposed rule offers at least a temporary win for defense contractors, who typically rely on progress payments to maintain necessary cash flow up and down the defense supply chain, including the cash flow needed to maintain innovative research and development activity. And while an updated set of proposed changes to the progress payment rules seem likely in the future, pressing pause on revisions offers contractors an opportunity to take an active role in helping to frame the Department’s policy on progress payments. Deputy Secretary Shanahan left the door open for continued discussion, providing lawmakers and industry the opportunity to engage in efforts to improve the progress payment system and reduce administrative burden on both contractors and the Department, alike. To better meet the preferences set in Section 831, the stakeholders involved will need to focus on payments that meaningfully align with contractor achievement and performance outcomes, in a way that is objective and provides a measure of predictability and reliability to contractors. Developing a rule that would achieve these goals would best serve both the Department and the contractors on which the Department relies, as well as the public’s interest in maintaining the United States’ national security in an increasingly challenging environment.

[1] Although the rule was rescinded before formal comments were due, a number of industry groups, including the Professional Services Council (PSC), the Aerospace Industries Association, and the National Defense Industrial Association, opposed the proposed rule in writing and during a DoD Public Meeting held on September 14, 2018.

]]>The Trump Administration Issues Its R&D Budget Priorities for FY 2020https://www.hlregulation.com/2018/08/13/fy2020rdbudget/
Mon, 13 Aug 2018 14:23:07 +0000https://www.hlregulation.com/?p=10716On July 31, the Director of the Office of Management and Budget, Mick Mulvaney, and the Deputy Assistant to the President, Office of Science and Technology Policy, Michael Kratsios, jointly issued a memorandum on “FY 2020 Administration Research and Development Budget Priorities.” This is an annual document, providing overall policy guidance to the federal agencies

]]>On July 31, the Director of the Office of Management and Budget, Mick Mulvaney, and the Deputy Assistant to the President, Office of Science and Technology Policy, Michael Kratsios, jointly issued a memorandum on “FY 2020 Administration Research and Development Budget Priorities.” This is an annual document, providing overall policy guidance to the federal agencies as they prepare their budget submissions for the next fiscal year. The guidance does not include any specific funding targets, or other specific direction. But the guidance does give an indication of Administration thinking, and that thinking is showing signs of better appreciating the role of federal research and development spending in building a more robust economy than reflected in last year’s guidance.

The aspect of the Administration’s approach to concerns that U.S. leadership in technology was slipping, endangering U.S. military superiority, that has grabbed the headlines has been the effort to rein China in – most notably through revisions to the law controlling foreign investments in the United States (CFIUS). These revisions are embodied in legislation entitled the Foreign Investment Risk Review Modernization Act (FIRRMA), which was incorporated into the National Defense Authorization Act for Fiscal Year 2019 (NDAA for FY 2019). As of this writing, the NDAA for FY 2019 has passed both chambers, and is awaiting presidential signature. Limiting Chinese investments in U.S. “emerging and foundational technology” companies, as FIRRMA will do, might limit the flow of U.S. developed technology breakthroughs to China, but it will do nothing to help the United States to make those breakthroughs in the first place. Indeed, it might even slow U.S. technological progress if the flow of Chinese capital to U.S. start-ups is reduced by implementation of FIRRMA.

More quietly, the FY 2020 guidance seems to reflect a different, more positive approach to the apparent slippage of U.S. technological superiority. The FY 2020 guidance declares that

Federal R&D dollars focused primarily on basic and early-stage applied research, paired with targeted deregulation, and investment in science, technology, engineering, and mathematics (STEM) education and workforce development, will strengthen the Nation’s innovation base and position the United States for unparalled job growth, continued prosperity, and national security.

The reference in the FY 2019 guidance to budget neutrality is nowhere to be seen in the FY 2020 guidance. Although both documents state that federal spending should focus on basic and early-stage applied research, the FY 2020 guidance notes the importance of programs that improve the transition of federally funded technologies from discovery to practical use. In addition, the FY 2020 guidance is sprinkled with far more references to specific technology areas, reflecting an enthusiasm that seems lacking in the FY 2019 guidance. There are references to artificial intelligence, autonomous systems, hypersonics, advanced microelectronics (including exploring novel pathways to advance computing in a post-Moore’s Law era), computing (and in particular quantum information science), and cyber capabilities (including adaptive and automated defensive measures). There is also a discussion of the importance of creating the conditions for the development of an industrial base for commercial activities in space.

Enthusiasm, and expressions of recognition of the importance of research and development, including recognition of the critical role that federal funding of basic research plays in the building of a foundation for technological leadership, is all well and good, but providing the resources to back up the words of the guidance is what really counts. If Congress adopts the Senate Appropriations Committee’s two billion dollar plus bump-up in R&D funding, compared to the House-passed bill and compared the President’s budget, that will go a long way in answering the question whether the U.S. has the will to do what is necessary to maintain its technological edge.

]]>SBA Update: Less Than 1% Minority Shareholder Interest Could Impact Eligibility for Small Business Contract Awardshttps://www.hlregulation.com/2018/07/26/sba-update/
Thu, 26 Jul 2018 13:43:48 +0000https://www.hlregulation.com/?p=10689The U.S. Small Business Administration (SBA) Office of Hearings & Appeals (OHA) recently held that an entity may be affiliated with another entity solely because it holds a very small minority ownership interest (less than 1%) in that entity. OHA’s ruling is noteworthy because under the SBA’s rules, the employees or revenue (depending on the

]]>The U.S. Small Business Administration (SBA) Office of Hearings & Appeals (OHA) recently held that an entity may be affiliated with another entity solely because it holds a very small minority ownership interest (less than 1%) in that entity. OHA’s ruling is noteworthy because under the SBA’s rules, the employees or revenue (depending on the NAICS code) of a concern and its “affiliates” must be aggregated when determining a small business concern’s size and eligibility for small business set-aside contracts. The decision should disabuse contractors and investors alike of any perception that very small minority ownership interests cannot give rise to affiliation.

Entities are considered affiliates under the SBA’s rules if one controls or has the power to control the other, or if a third party or parties controls or has the power to control both. It is well-established that one entity does not need to have controlling share of stock ownership (above 50%) in another for the two entities to be deemed affiliates under the SBA’s rules. However, some government contractors might believe that a very small minority ownership interest cannot create affiliation. OHA’s decision in Melton Sales & Service, Inc., SBA No. SIZ-5893 (Mar. 29, 2018) (Melton) confirms that such belief is mistaken.

In Melton, an unsuccessful offeror in an Army procurement protested the size status of the awardee, MTP Drivetrain Service, LLC (MTP). The protester contended that one of MTP’s affiliates, Joe Gear Holdings, LLC (Joe Gear), was also affiliated with VIPAR Heavy Duty Inc. (VIPAR) in part because Joe Gear was one of 120 stockholders that each held one voting share in VIPAR (an approximate 0.8% interest). The protester argued that because Joe Gear was affiliated with VIPAR, and MTP was affiliated with Joe Gear, that VIPAR was affiliated with MTP and that VIPAR’s employees should be counted when determining MTP’s size. OHA agreed, noting that Joe Gear was one of multiple minority shareholders in VIPAR whose investments were equal or approximately equal in size, and therefore there was a rebuttable presumption that each minority shareholder controlled VIPAR. OHA relied on the following SBA regulation at 13 C.F.R. § 121.103(c)(2):

If two or more persons (including any person, concern or other entity) each owns, controls, or has the power to control less than 50 percent of a concern’s voting stock, and such minority holdings are equal or approximately equal in size, and the aggregate of these minority holdings is large compared with any other stock holding, SBA presumes that each such person controls or has the power to control the concern whose size is at issue. This presumption may be rebutted by a showing that such control or power to control does not in fact exist.

Critically, OHA stated that the presumption that each minority shareholder controls an entity “may be rebutted with evidence to the contrary, such as evidence demonstrating another party such as the Board of Directors and CEO or President controls the concern,” but that absent “clear evidence demonstrating control or the power to control by another party, it is presumed that each minority shareholder has equal control over the subject concern, regardless of the size of the shareholder’s interests.” OHA also described the inability of any one of the 120 stockholders to individually exercise actual control over the entity as “immaterial” to the affiliation analysis. Because MTP in Melton did not establish that any party other than the 120 stockholders controlled the entity, it failed to rebut the presumption of affiliation.

OHA’s ruling in Melton did not impact the awardee’s eligibility for the contract award because affiliation with VIPAR did not push MTP above the size standard threshold that applied to the procurement. In many circumstances, however, affiliation with other entities can render a contractor ineligible for small business contract awards. Small business contractors doing deals therefore should be cautious in deciding how to structure minority investments in other entities. An investment may not make strategic sense if it results in the business being determined ineligible for small business contract awards. Similarly, private equity groups and other parties seeking to invest in small business concerns should be careful when structuring such investments because a minority investment that appears to give the investor no actual control over the company could be sufficient to create affiliation between the concern and the investor.

The authors are available for questions. The Government Contracts Practice at Hogan Lovells helps advise companies that may have questions concerning SBA regulatory implications of transactions with small business contractors.

]]>Legislative and Regulatory Update on Federal Supply Chain Risk Managementhttps://www.hlregulation.com/2018/07/12/legislative-and-regulatory-update-on-federal-supply-chain-risk-management/
Thu, 12 Jul 2018 16:03:56 +0000https://www.hlregulation.com/?p=10668The U.S. Government is renewing its focus on mitigating technological risks by regulating the supply chain for various goods and services. To achieve these goals, Congress and agencies have introduced, and in some cases enacted, legislation and regulations that direct agencies to identify, assess, and mitigate supply chain risks generally as well as prohibit agencies

]]>The U.S. Government is renewing its focus on mitigating technological risks by regulating the supply chain for various goods and services. To achieve these goals, Congress and agencies have introduced, and in some cases enacted, legislation and regulations that direct agencies to identify, assess, and mitigate supply chain risks generally as well as prohibit agencies from purchasing goods and services from specific organizations. The primary aim of these efforts is to make U.S. information technology (“IT”) infrastructure less vulnerable to attacks from state and non-state actors. The most notable legislation and regulations thus far in 2018 are summarized below:

One of the most prominent legislative efforts addressing the U.S. Government’s supply chain would prohibit agencies from purchasing certain Chinese telecommunications equipment or services. The prohibition was first proposed in The Defending U.S. Communications Act (H.R. 4747 / S. 2391). If enacted, that legislation would prohibit all agencies from:

Procuring or obtaining “any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system” or

Entering into, extending, or renewing a contract “with an entity that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.” H.R. 4747 § 3(a).

“Covered telecommunications equipment or services” means telecommunications equipment or services “produced” or “provided” by “an entity that the head of the relevant agency reasonably believes to be an entity owned or controlled by, or otherwise connected to” the government of the People’s Republic of China. Id. at § 3(b)(2), (3).

These prohibitions have largely been incorporated into the House of Representatives’ and Senate’s versions of the National Defense Authorization Act (“NDAA”) for Fiscal Year 2019, with some differences. The House version would apply these prohibitions only to the Department of Defense (“DoD”). SeeH.R. 5515 § 891. However, section 6702 of the Senate version would apply these restrictions to all federal agencies. S. 2987 § 6702(b). It would also expand the restrictions to prohibit agencies from “obligat[ing] or expend[ing] loan or grant funds to procure or obtain, extend or renew a contract to procure or obtain, or enter into a contract (or extend or renew a contract) to procure or obtain” covered telecommunications equipment or services. Id. § 6702(c).

On June 19, 2018, Sens. Claire McCaskill (D-MO) and James Lankford (R-OK) introduced the Federal Acquisition Supply Chain Security Act of 2018 (“FASCSA”) to manage supply chain risk. If passed, this bill would establish the Federal Acquisition Security Council (the “Council”), which will be charged primarily with the following tasks:

Identifying and “assessing threats and vulnerabilities relating to supply chain risk posed by the acquisition of information technology to national security and the public interest” and sharing that information amongst federal agencies and, as appropriate, with the private sector. S. 3085 § 1323(a).

“Issuing guidance to executive agencies for incorporating information relating to supply chain risks and other relevant information into procurement decisions for the protection of national security and the public interest.” Id. § 1323(a)(3).

“Developing standards and measures for supply chain risk management, including assessments, evaluations, mitigation, and response that take into consideration national security and other factors relevant to the public interest.” Id. § 1323(a)(4).

“Consulting, as appropriate, with the private sector and other nongovernmental stakeholders on issues relating to the management of supply chain risks posed by the acquisition of information technology.” Id. § 1323(a)(5).

“Determining whether the exclusion of a source made by one executive agency should apply to all executive agencies upon receiving a notification under section 4713 and carrying out such other actions as are agreed upon by the Council.” Id. § 1323(a)(6).

The Council will comprise representatives from the Office of Management and Budget (“OMB”), the General Services Administration (“GSA”), the Department of Homeland Security (“DHS”), the Office of the Director of National Intelligence (“ODNI”), the Federal Bureau of Investigation (“FBI”), DoD, the National Institute of Standards and Technology (“NIST”), and any other agencies the Chair of the Council elects to include. S. 3085 §§ 1322(a), (b)(1).

The Enhance Cybersecurity for Small Manufacturers Act would require NIST to work with DoD and the Hollings Manufacturing Extension Partnership to help “small manufacturers in the defense industrial supply chain” understand and address cybersecurity threats. S. 2666 § 3(b)(1). These efforts would include helping “small manufacturers conduct voluntary self-assessments in order to understand operating environments, cybersecurity requirements, and existing vulnerabilities”; transferring NIST’s “technology and techniques” to small manufacturers “to protect covered defense information, including controlled unclassified information”; and creating “a cyber counseling certification program” (or using a similar existing program) “to certify small business professionals and other relevant acquisition staff within the [DoD] to provide cyber planning assistance to small manufacturers in the defense industrial supply chain.” S. 2666 § 3(b)-(e).

Source code reviews have received increased attention in the media in recent months. A source code review is the process of reviewing the code of software or applications to identify security flaws. The U.S. Government has expressed concern that allowing foreign governments to review source codes of software and applications sold to the U.S. Government could create or increase cybersecurity threats. To mitigate these risks with respect to DoD, the Senate version of the 2019 NDAA would prohibit DoD from “us[ing] a product, service, or system relating to information or operational technology, cybersecurity, an industrial control system, a weapons system, or computer antivirus provided by a person unless that person discloses” whether it has allowed, or is required to allow, a foreign government to review the source code of such a product, system, or service. S. 2987 § 1639(a). Additionally, all contracts for such products, systems, or services “shall include a clause requiring” contractors to disclose any actual or required foreign government source code reviews throughout the life of the contract. Id. at § 1639(b). Any information disclosed in accordance with these requirements would be maintained in a “registry.” Id. at § 1640. Information contained in the registry would be exempt from disclosure under the Freedom of Information Act (“FOIA”).

On June 15, 2018, the Federal Acquisition Regulation (“FAR”) Council issued an interim rule that will prohibit U.S. Government agencies from using “any hardware, software, or services developed or provided, in whole or in part, by” Kaspersky Lab, a successor entity to Kaspersky Lab, a Kaspersky Lab corporate affiliate, or an “entity of which Kaspersky Lab has a majority ownership.” 83 Fed. Reg. 28,144. This rule was issued in accordance with Section 1634 of the NDAA for 2018 and will take effect July 16, 2018. The prohibition arises from concerns over Kaspersky Lab’s alleged ties to the Russian Government and would purport to make U.S. Government IT systems less susceptible to hacking by foreign actors. This rule follows DHS’s September 2017 directive instructing all agencies to identify and purge Kaspersky products from their systems. See Binding Operational Directive 17-01, 82 Fed. Reg. 43,782 (Sept. 19, 2017).

On May 2, 2018, the FCC issued a notice of proposed rulemaking titled Protecting Against National Security Threats to the Communications Supply Chain Through FCC Programs. 83 Fed. Reg. 19,196 (May 2, 2018). This proposed rule would prohibit the FCC from using the Universal Service Fund “to purchase or obtain any equipment or services produced or provided by a company posing a national security threat to the integrity of communications networks or the communications supply chain.” Id. at 19,198.